International Capital Markets, Asset Pricing and Financing the Firm

8/2/2019 International Capital Markets, Asset Pricing and Financing the Firm

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INTERNATIONAL CAPITAL MARKETS, ASSET PRICING AND

FINANCING THE FIRM

INTERNATIONAL ASSET PRICING AND PORTFOLIO THEORY

DIVERSIFICATION

Diversification Benefits

The idea of diversification was introduced in 1952 by Harry Markowitz. The idea thatdiversification reduces risk is based on modern portfolio theory. (Rockefeller, 2001)Solnik (1974) found that international equity diversification reduces risk. Currently thereare two competing views on the value of international diversification. The first states thatinternational diversification reduces risk. The second view agrees that diversification isbeneficial, but the additional qualitative risks of investing in foreign securities outweighpotential returns. (Rockefeller, 2001) The second view is similar to the argumentspresented in the Contagion section of this paper. If investment economic disturbances

are country specific, then low correlation between markets will lead to diversificationbenefits; but if market correlations increase after a negative shock then the rationale ofinternational diversification is undermined. (Forbes and Rigobon, 2001) Emerging marketequities generally have higher average returns, lower correlations with developed markets,greater serial correlation, and greater volatility. (Solnik, 2000)

Diversification Costs

The main problems with international investing are currency risk, information costs,controls to the free flow of capital, legal risk, and country or political risk. Currency riskcan affect both the total return and the volatility of the investment, but it can be managedby selling futures or forward currency contracts, buying put currency options, or by

borrowing foreign currency to finance the investment. (Solnik, 2000) Information costsinclude the actual monetary costs of acquiring information and non-monetary costsassociated with understanding different cultures, accounting standards, and legalenvironments. (???, 000) Political risk can take the form of a prohibition or repatriation ofprofits or capital investment from a foreign country. (Solnik, 2000)

Operating risk is the risk that the broker or the exchange will fail to record your investmenttransactions correctly and in a timely manner. (Rockefeller, 2001) Additional risksinclude: corruption, shortages of skilled workers, lack of sufficient investment ininfrastructure (from computers at the exchange to the national electric power grid andtelephone system), or an overall lack of discipline because of weak leadership.

The idea that the virtues of diversification are outweighed by the additional qualitativerisks of investing in foreign securities is magnified in emerging markets where lessinformation, unclear accounting standards, low investor protection, and other risks mayexist. (Rockefeller, 2001) Finally, although emerging markets offer diversificationbenefits, the correlation is still generally positive; therefore, in some periods whendeveloped markets dropped, emerging markets dropped as well and, due to their highvolatility, by a large amount. (Solnik, 2000)


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THE COST OF CAPITAL AND THE MULTINATIONAL FIRM: SOURCING

EQUITY AND DEBT

Global Cost of Capital

Access to global capital markets can allow a firm to reduce its cost of capital. Companiesseek a lower cost of capital through mergers and acquisitions, foreign direct investment,and other global activities. A competitive cost of capital depends on firm-specificcharacteristics that attract international portfolio investors and the liberalization of marketswhere companies have the freedom to source capital in liquid markets. Table 1 points outthe dimensions of the cost and availability of capital.

Table 1: Dimensions of the Cost and Availability of Capital Strategy

Source: Eiteman et al (2001)

Stock Market Liberalization1

According to Solnik (2000), The issue of liberalization is central to the analysis ofemerging markets. Historically, international equity markets have had restrictions oninvestments from outsiders. When the domestic economy is closed, and investors accessis restricted, there is no reason to expect domestic assets to be priced internationally.(Solnik, 2000) But in the late 1980s and early 1990s many emerging markets decided to

1 See Bekaert, Harvey, and Lumsdaine (1998) for an analysis of the various liberalization measures for 20emerging economies.

Firms securities appeal onlyto domestic investors

Firm-Specific Characteristics

Firms securities appeal tointernational portfolio investors

Illiquid domestic securities market

and limited international liquidity

Highly liquid domestic market and

broad international participation

Market Liquidity for Firms Securities

Effect of Market Segmentation on Firms Securities

Segmented domestic securities

market that prices shares

according to domestic standards

Access to global securities market

that prices shares according to

international standards

Firms securities appeal onlyto domestic investors

Firm-Specific Characteristics

Firms securities appeal tointernational portfolio investors

Illiquid domestic securities market

and limited international liquidity

Highly liquid domestic market and

broad international participation

Market Liquidity for Firms Securities

Effect of Market Segmentation on Firms Securities

Segmented domestic securities

market that prices shares

according to domestic standards

Access to global securities market

that prices shares according to

international standards


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open up their equity markets to outside investors. When the economy opens up and accessto equity markets is liberalized (or deregulated). Asset pricing should become global. Thedecision by a countrys government to allow foreigners to purchase shares in that countrysstock market is known as stock market liberalization. (Henry, 2000)

Table 2 First Stock Market LiberalizationCountry Date of First Stock Market Liberalization

Country Date of First Stock

Market Liberalization

Argentina November 1989 Malaysia May 1987

Brazil March 1988 Mexico May 1989

Chile May 1987 The Philippines May 1986

Colombia December 1991 Taiwan May 1986

India June 1986 Thailand January 1988

Korea June 1987 Venezuela January 1990

Source: Henry (2000)

Systematic Risk and the Discount RateThere is a large body of literature that concludes systematic risk is reduced throughinternational diversification and that the betas of multinational enterprises are negativelyrelated to the degree of international involvement of a firm. (Reeb et al, 1998) Anexample of the effect of systematic risk can be shown with the capital asset pricing model(CAPM):

Figure 3: Capital Asset Pricing Model

( )jt ft j mt ft t

R R R R = +

Where jtR is the random return on the jth security at time t, ftR is the risk-free rate at time t,

j (beta) is the measure of the systematic risk of firm j, mtR is the market return at time t,

and t is the mean zero error term. j is the correlation coefficient between security j

( )jm and the market and the standard deviation of the firm j ( )j , divided by the standard

deviation of the market ( )m .

Figure 4: Calculation for Beta

( )jm j

i

m

=

If global diversification reduces the risk, then firms should use a lower discount rate fortheir global projects. This is inconsistent with the observation that firms use a higherdiscount rate for evaluating international projects. (Reeb et al, 1998) Reeb, Kwok, andBaek (1998) argue that systematic risk may actually increase in the process of globalizationthrough exchange rate risk, political risk, the agency problem, asymmetrical information,and managers self-fulfilling prophecies. Foreign exchange risk is the risk associatedwith exposure to fluctuations in exchange rates. Political risk is the risk caused by the hostcountrys government. Examples of political risks are fund remittance control, regulations,


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and the risk of appropriation of funds. Political risk is discussed in greater detail in asubsequent section. The agency problem is the potential decrease in the ability to monitormanagers. (Lee and Kwok, 1988) Due to geographical constraints, cultural differences,and timing issues, monitoring overseas operations becomes more difficult and lesseffective. (Reeb et al, 1998) Asymmetrical information is the advantage local companies

have over foreign competitors. Finally, Reeb, Kwok, and Baek (1998) attribute managersself-fulfilling prophecies to an increase in the systematic risk of the multinationalenterprise. For example, if firms use a higher discount rate for evaluating internationalprojects, then as the firm expands internationally; it will increase its systematic risk.

Figure 5: Managers Self-fulfilling prophecy

Based on these observations, Reeb et al (1998) suggest that internationalization myincrease the systematic risk of the firm. This claim is supported by empirical results that

show a significant positive relationship between internationalization and the MNCssystematic risk. Their work is also consistent with the evidence that MNCs have lowerlevels of debt and with the customary practice of using a higher discount rate for evaluatinginternational projects. Kwok and Reeb (2000) add to this conclusion by suggesting anupstream-downstream hypothesis.

D-CAPM

The downside capital asset pricing model (D-CAPM) measures the downside beta of riskand is proposed by Estrada (2002) as an alternative to the capital asset pricing model(Figure 3) to measure the risk of emerging market investments. The basis for this argumentis that investors are not particularly worrisome of upside risk, while downside risk is

always a problem. Additionally, since the CAPM stems from an equilibrium in whichinvestors maximize a utility function that depends on the mean and variance of returnswhere the variance is assumed to be symmetric and normally distributed, it does notcorrectly measure the downside beta of emerging market equities.

Estrada uses the mean-semivariance (MSB) and the D-CAPM to measure returns by firstcomputing the downside standard deviation of returns. In the traditional CAPM modelstandard deviation is measured by the square root of the squared sum of deviations fromthe mean (i.e. portfolio returns (Ri) minus the mean returns (i)). To measure the downsidestandard deviation he takes the square root of the sum of the minimum of the portfolioreturn (Ri) minus a given benchmark return (Bi) or zero squared. Additionally, variance is

the squared standard deviation. These equations are given below.

Figure 6: Standard Deviation and Variance Calculations

2 2 2( ) ( )i i i i i i

E R and E R = =

Figure 7:Downside Standard Deviation andDownside Variance Calculations

Expect internationalproject to be riskier

Employ a higherdiscount rate

Projects are riskierand have higher

Firms risk


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( )( ){ } ( )( ){ }2 2

2,0 ,0Bi i Bi Bi i Bi

S E Min R and S E Min R = =

Once the downside standard deviation of returns (or semideviation) is calculated, hecalculated the downside covariance (or cosemivariance). Covariance for the general

CAPM equation is the sum of the deviations of the portfolio returns (Ri i) multiplied bythe deviations of the market returns (Rm m). The downside covariance is the sum of theminimum of the deviations of portfolio returns minus the benchmark or zero multiplied bythe minimum of the market return deviations or zero. The equations for covariance anddownside covariance are given below.

Figure 8: Covariance

( ) ( )im i i m mR R =

Figure 9:Downside Covariance

( )( ) ( ){ },0 ,0Bi i Bi m mS E Min R x Min R =

The correlation equation combines the covariance and standard deviation equations. Thecorrelation of an asset (i) with the market (m) is given as ( im).The downside correlation(Bi(m)) is a measure of the downside standard deviation and the downside covariance.

Figure 10: Correlation

( ) ( )

( ) ( )2 2

i i m mimim

i mi i m m

R R

x E R E R

= =

Figure 11:Downside Correlation

( )( ) ( ){ }

( )( ){ } ( ){ }( )

( )2 2

,0 ,0

,0 ,0

i Bi m mBi m

Bi m

Bi mi Bi m m

E Min R x Min RS

S x SE Min R x E Min R

= =

Beta is the most widely used measure of risk and plays a major role in the capital assetpricing model as a measure of firm-specific risk. The beta and the downside beta aremeasured as the covariance divided by the variance.

Figure 12: Beta( ) ( )

2 2( )

i i m mimi

m m m

R R

E R

= =

Figure 13:Downside Beta


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( )( ) ( ){ }

( )( ){ }( )

2 2

,0 ,0

,0

i Bi m mBi mD

i

mm m

E Min R x Min RS

S E Min R

= =

The capital asset pricing model (CAPM) is the appropriate risk-free rate (Rf) added to betamultiplied by the market risk premium where the market risk premium is the return on themarket (Rm) minus the risk-free rate (Rf). Similarly the D-CAPM uses an appropriaterisk-free rate added to the downside beta multiplied by the market risk premium.

Figure 14: CAPM

( ) ( )i f i m f

E R R R R=

Figure 15: D-CAPM

( ) ( )D Di f i m f

E R R R R=

The D-CAPM is becoming an important part of international finance. Estrada (2002) usesthe D-CAPM and analyses data from the Morgan Stanley Capital Indicies (MSCI) to lookat the sensitivity of emerging markets to the downside beta. He finds that emergingmarkets are much more sensitive to the downside beta; and concludes that in order todiscount cash flows for projects in these countries; D-CAPM should be considered as anappropriate measure.

International Diversification

Butler and Joaquin (2002) look at another aspect of downside risk, the extent of the non-normality of correlation during extreme market downturns. Butler and Joaquin (2002)point out the stock market correlations are important because of their role in portfolio

diversification. However, if correlations are higher than normal during volatile periods,then the gains from diversification may be weakened. Using three of the basic modelsemployed in financial literature, the bivariate normal model, ARCH/GARCH model, andthe student t distribution, they compare incidences of extreme market movement in each ofthe distributions. Butler and Joaquin (2002) find that international stock market co-movements are higher than expected during bear markets relative to each benchmark andsignificantly different than the normal distribution.

Their findings have implications for international asset allocation and risk management.For example, in international asset allocation the country weights should be considered inlight of their findings, current allocations may be overstating diversification benefits, and

investors with risk aversion should rethink their portfolios. The challenge left for investorsis to anticipate which markets will suffer higher-than-normal bear market correlationsduring future downturns. The authors admit this analysis is difficult.

International CAPM


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The multifactor International Capital Asset Pricing Model (ICAPM) developed by Solnik(1983) and Sercu (1980) was an extension of the single factor ICAPM proposed by Grauer,Litzenberger, and Stehle (1976). The idea behind Koedijk et al (2002) is that if the firmsare exposed to global risk factors than an international finance approach to measuring thecost of capital is validated. In other words, a pricing error arises for an individual firm if

the direct approach of computing the cost of capital through the multifactor ICAPMleads to a different result than the indirect approach of using the domestic CAPM.(Koedijk and van Dijk, 2002)

Assume a world with N + 1 currencies. Then the ICAPM has N + 1 systematic risk factors(the global market portfolio and N exchange rates). The return of asset i (Ri) and the returnof the global market (RG) are expressed in the numeraire currency. The numerairemeasure is one in which there is no actual money or currency. The numeraire can also bedefined by the requirement that prices sum to a given constant. ($) is chosen as the homecurrency of asset i, (S) represents the vector of nominal exchange rate returns on the other l= 1, , N currencies against currency 0. The vector (r) denotes the nominal returns on the

risk-free asset in country l, and (rf) is the risk-free rate in the home country. Finally (t) isthe vector of ones, (di1) and (di2) represent the global market betas and the exchange ratebetas.

Figure 16: International CAPM (ICAPM)

[ ] $ 1 $ 2i f G i iE R r E R r d E S r tr d= + + +

Empirical Tests for the International CAPM

One of the basic assumptions for the international CAPM is the absence of controls oncapital flows. Controls to limit foreign investment or restrict domestic investment abroadinclude: limits on the fraction of equity that can be held by foreigners and restrictions onthe industries in which foreigners can invest. Investors in some Eurpoean countries have touse a special financial exchange rate to invest abroad. (Solnik, 2000) Sercu-Uppal(1995) cite several authors who believe that direct capital controls on foreign investmentare no longer as important in determining portfolio choice and asset pricing, at least in themain OCED countries. Solnik (2000) adds that there has been a slow but generalworldwide relaxation of [investment] constraints.

Weighted-Average Cost of Capital

Another key insight from finance theory is that any use of capital imposes an opportunitycost on investors. In other words, funds are diverted from other potential investments inorder to fund selected investments. The Weighted-Average Cost of Capital (WACC)

provides a benchmark for selecting projects. In the formula below the weight of equity(market value of equity divided by the total value of equity plus debt) is multiplied by thecost of equity (Re). This value is added to the weight of debt (the market value of debtdivided by the total value of equity plus debt) multiplied by the cost of debt (RD) andreduced by the corporate tax rate (t).

Figure 17: Weighted-Average Cost of Capital


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( ) ( )(1 )e DE D

WACC R R t E D E D

= + + +

Bruner et al (2003) point out that finance theory has several important requirements whenestimating a companys WACC. First, the cost of equity and cost of debt should be based

on current market prices. Second, the weights should also be current rather than historical.And finally, the cost of debt should be the after-tax cost of debt to reflect the benefits of thetax deductibility of interest. But as Bruner et al (2003) points out, this is more difficult inpractice than in theory.

SOURCING EQUITY AND DEBT GLOBALLY

There are several channels for international economic involvement. The first is via a directinvestment in foreign shares. This method still has restrictions but has been around sincethe turn of the century. In some cases investors from small nations consider foreigninvestment a prudent compliment to the limited menu of opportunities in their domestic

equity markets. (Levich, 2001)

The second method of investing in foreign equity is via Global depository receipts (GDRs)or American Depository Receipts (ADRs). Depository receipts were originally created byJ.P. Morgan in 1927 as a means for U.S. investors to participate in the London StockMarket. (Miller, 1999) Global Depository Receipts refer to certificates traded outside theUnited States; ADRs will be discussed in greater detail in this section. The final method isthrough mutual funds. Professionally managed mutual funds may be a way for smallerinvestors to quickly obtain a broad portfolio of securities. (Levich, 2001)

American Depository Receipts

In the United States the primary vehicle through which non U.S. companies raise capital inU.S. markets is through the issuance of American Depository Receipts (ADRs). (Foersterand Karolyi, 2000) International listings may provide an avenue for firms and investors tosidestep some of the restrictions on capital flows that contribute to the segmentation ofinternational capital markets. (Martell et al., 1999) There are two ways to list securitiesoutside of the firms home country. The first is through a direct listing. This requires thatthe firm meet all of the exchanges listing requirements. The second method of listing asecurity on an exchange outside of the home country is through an American DepositoryReceipt (ADR). ADRs are denominated in U.S. dollars and dividends are paid in U.S.dollars.

An important development in depository receipts is the Rule 144A Depository Receiptsadopted by the securities exchange commission (SEC) in April of 1990. Rule 144A allowsqualified institutional buyers to trade among themselves without a holding requirement.{prior to 144A, privately placed depository receipts could not be resold until they had beenheld by investors for a period of three years. (Miller, 1999)

International debt markets


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Debt markets play an important role in the matching strategy for managing foreignexchange rate exposure. The basic operating strategy for transaction exposure is to fundassets with liabilities. These liabilities should be in the same currency and have the samematurity in order to offset one another. A firm that uses the debt currency as thedenomination of its assets and liabilities is focused on accounting exposures, while a firm

that uses the currency of denomination of cash flows arising from assets and liabilities isinterested in transaction and operating exposures.

International debt markets can be accessed through bank syndicated loans (also known aseuro credits), euro notes, and euro bonds. Bank syndicated loans, or euro credits, are bankloans to businesses, sovereign governments, or to other banks denominated inEurocurrencies. These loans are funded by banks in countries other than the country inwhich the loan is denominated. Eurocurrencies are domestic currencies of one country ondeposit in another country. Due to the large size of euro credit loans, banks form asyndicate to diversify the total risk. The euro note market is the collective term thatdescribes short- to medium-term debt instruments sourced in the Eurocurrency markets.

Finally, euro bonds are underwritten by an international syndicate of financial institutionsand are sold exclusively in countries other than the country in which the bond isdenominated. This is opposed to a foreign bond that is denominated in a foreign currencyand sold abroad.

INTERNATIONAL CAPITAL MARKETS-EMPIRICAL LITERATURE

Foerster and Karolyi (2000) look at the long-run performance of global equity offeringsand find that global equity offerings with American Depository Receipts under-performlocal market benchmarks of comparable firms by 8-15% over the three-year periodfollowing issuance. They attribute this underperformance to the magnitude of investmentbarriers that induce the segmentation of capital markets around the world. Barriers includetaxes, legal and regulatory regulations, and information asymmetries. These barriers affectoverseas investment.

Liberalization

The idea that financial market liberalization has significant economic benefits is also putforth by Errunza and Miller (2000). Historically, international equity markets have hadrestrictions on investments from outsiders. When the domestic economy is closed andinvestors access is restricted, there is no reason to expect domestic assets to be pricedinternationally. (Solnik, 2000) But in the late 1980s and early 1990s many emergingmarkets decided to open up their equity markets to outside investors. When the economyopens up and access to equity markets is liberalized (or deregulated), asset pricing shouldbecome global. The decision by a countrys government to allow foreigners to purchaseshares in that countrys stock market is known as stock market liberalization. (Henry,2000) Levine and Zervos (1998) find that liberalization tends to increase various measuresof stock market development, including market capitalization to GDP and liquiditymeasured by the total value traded to GDP or, alternatively, to total market capitalization.An important policy implication based on the evidence presented by Garcia and Liu (1999)indicates that economic development plays an important role in stock market development.


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Errunza and Millers (2000) results are consistent with international asset pricing theory,which suggests a lowering in the cost of capital for firms in segmented markets that canaccess the international capital market. In fact, they find a decline in expected return that isnegatively related to the firms diversification potential and the price effect occurs on the

announcement followed by price stabilization. Additionally the decline in returns is relatedto the firms diversification potential.

In another paper by Miller (1999) she adds the additional factors of the choice of exchange,geographical location, and avenues for raising capital as factors that effect stock pricereaction. Regarding the geographic location issue, if share value is influenced byinternational restrictions to capital flows, then the stock price reaction will differ acrossmarkets in relation to the severity of the restrictions. Indeed, firms located in marketswhere barriers to capital flow are more acute experience larger than abnormal returns upondual listings.

Home BiasThe traditional argument in support of portfolio diversification is that emerging marketsoffer higher returns than those available in mature markets and are likely to be weaklycorrelated with mature markets. (Levich, 2001a) Still, most investor portfolios reflect ahome country bias in equities as well as bonds. (Levich, 2001b) Factors such astransaction costs and taxes have been used to justify this bias. Investing overseas takesgreater resources and the foreign investor faces foreign exchange risk and possibleinformation disadvantages. (Levich, 2001a) Additional cultural differences could be amajor impediment to foreign investment, investors often feel unfamiliar with foreigncultures and markets. (Solnik, 2000) The different trading procedures, report presentations,languages, and time zones all contribute to a perception of risk due to greater unfamiliarity.(Solnik, 2000)

Bullen, et al (2002) point out that in 2001, defined-benefit allocations (institutionalinvestors) to international equities averaged about 13% of total portfolios. The largest 200corporate pension plans in the U.S. had an average international allocation of 16%.Pension plans in the United Kingdom have equity allocations outside their home markets ofbetween 20-30%. Investors in defined-contribution plans (individual investors) have anaverage of only 3% of their portfolios allocated to international equities. This home biasin investing is a stark contrast to the corporate stakes overseas through foreign directinvestment.

Solnik (2000) points out that it can be more costly in terms of management fees, taxes,commissions, and custody for an investor to invest abroad. For example, for a U.S.investor an increase in total costs could be about 0.2 to 0.75% for stocks and 0.2% forbonds. But according to Solnik (2000) the benefits of international diversification stilloutweigh the costs.

Due to the real world phenomena of home bias in investing, alternate theories have beenconstructed to support the overweighting of home assets. Baxter et al (1998) developed a


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model where investors also consume non-traded goods that rely intensively on non-traded,domestic factors of production. They posit that an overweight position in home equities isan effective hedge against future consumption of nontraded goods. Lewis (1999) wrote asurvey on home country bias in equities and concluded that there is not a definitive answerto the real world observation that domestic investors favor domestic assets. Lewis (1999)

points out that while the costs to investing overseas are great, the potential gains fromdiversification benefits are far greater. She also notes that the turnover rate in foreignsecurities undermines the cost argument.

Contagion2

According to the World Bank, Contagion is the cross-country transmission of shocks or thegeneral cross-country spillover effects. Contagion can take place both during "good" timesand "bad" times. Then, contagion does not need to be related to crises. However, contagionhas been emphasized during crisis times. The World Bank gives a restrictive definition ofContagion as the transmission of shocks to other countries or the cross-countrycorrelation, beyond any fundamental link among the countries and beyond common

shocks. This definition is usually referred as excess co-movement, commonly explainedby herding behavior. The most restrictive definition of contagion is that it occurs whencross-country correlations increase during crisis times relative to correlations duringtranquil times.

The ultimate cause of contagion is debatable. Different papers point toward differentdirections. There are three categories of fundamental links, financial, real, and political.Financial links exist when two economies are connected through the international financialsystem. One example of financial links is when leveraged institutions face margin calls.When the value of their collateral falls, due to a negative shock in one country, leveragedcompanies need to increase their reserves. Therefore, they sell part of their valuableholdings on the countries that are still unaffected by the initial shock. This mechanismpropagates the shock to other economies. Another example of financial link is when open-end mutual funds foresee future redemptions after there is a shock in one country. Mutualfunds need to raise cash and, consequently, they sell assets in third countries.

Real links are the fundamental economic relationship among economies. These links havebeen usually associated with international trade. When two countries trade amongthemselves or if they compete in the same foreign markets, a devaluation of the exchangerate in one country deteriorates the other country's competitive advantage. As aconsequence, both countries will likely end up devaluing their currencies to re-balancetheir external sectors. Other types of real links, like foreign direct investment acrosscountries, may also be present.

Political links are the political relationships among countries. This link is much lessstressed in the literature. One example of political link is the following. When a countrybelongs to an association or "club of countries," with an exchange rate arrangement, the

2 Modified by Wendy Jeffus from http://www1.worldbank.org/economicpolicy/managing%20volatility/contagion/definitions.html


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political cost of devaluing is much lower when other countries have devalued. Therefore,crises tend to be clustered. A crisis in one country is followed by crises elsewhere.When fundamentals and commons shocks do not fully explain the relationship amongcountries, spillover effects have been attributed to herding behavior, either rational orirrational.

REFERENCES


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Bruner, Robert F., Eades, Kenneth M., Harris, Robert S., and Higgins, Robert C. (2003),Best practices in estimating the cost of capital: Survey and synthesis, Case Studies inFinance: Managing for Corporate Value Creation, 3rd ed. Irwin/McGraw-Hill, BostonCase 12, (Cost of Capital)

Butler, K.C. and Joaquin D.C. (2002) Are the gains from international portfoliodiversification exaggerated? The influence of downside risk in bear markets. Journal ofInternational Money and Finance 21 p. 981-1011.

Errunza, Vihang R., and Miller, Darius P. (2000) Market segmentation and the cost ofcapital in international equity marketsJournal of Finance and Quantitative Analysis, Vol.35, No. 4, p. 577-600.

Estrada, Javier (2002) Systematic Risk in Emerging Markets: The D-CAPM, EmergingMarkets Review

Foerster, Stephen R., and Karolyl, G. Andrew (2000) The long-run performance of globalequity offeringsJournal of Financial and Quantitative Analysis, Vol 35, No 4 p. 499-528.

Garcia, Valeriano F., and Liu, Lin, 1999, Macroeconomic determinants ofstock market development, Journal of Applied Economics, Vol. II, No. 1(May 1999) 29-59.

Grauer, F.L.A., Litzenberger, R.H., and Stehle, R.E. (1976) Sharing rules and equilibriumin an international capital market under uncertainty, Journal of Financial Economics, 3,233-256.

Henry, Peter Blair, 2000, Stock market liberalization, economic reform, and emergingequity prices,Journal of Finance 55, 529-564.

Koedijk, Kees G., Kool, Clemens J.M., Schotman, Peter C., van Dijk, Mathijs, (2002) Thecost of capital in international financial markets, Journal of International Money andFinance, 21, p. 905-929.

Koedihk, Kees G., van Dijk, Mathijs A. (2002) The cost of capital of cross-listed firmsEIM Report Series Research in Management, October.

Kwok, Chuck C. Y., and Reeb, David. (2000) Internationalization and Firm Risk: AnUpstream-Downstream Hypothesis, Journal of International Business Studies, 31, 4; 611-629.

Lee, Kwang and Chuck Kwok. (1988). Multinational corporations vs. domesticcorporations: International environmental factors and determinants of capital structure.Journal of International Business Studies.


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Levich, Richard M., 2001, International Financial Markets 2nd edition, Published byMcGraw-Hill/Irwin, Copyright McGraw-Hill Companies, inc.

Levine. R. and S. Zervos (1998), Global Capital Liberalisation and Stock MarketDevelopment, World Development, Vol. 26 No. 7, pp. 1169-1183.

Martell, Terrence F.; Rodriguez, Jr., Luis; and Webb, Gwendolyn P., 1999, The impact oflisting Latin American ADRs on the risks and returns of the underlying shares, GlobalFinance Journal10, 147-160.

Miller, Darius P. (1999) The market reaction to international cross-listings: evidence fromdepository receiptsJournal of Financial Economics, 51 p. 103-123.

Reeb, D. and Kwok, C. and H. Young Baek (1998) Systematic Risk of the MultinationalCorporation, Journal of International Business Studies, Second Quarter 1998.

Rockefeller, Barbara, 2001, CNBC 27/7 Trading: Around the clock, around the worldPublished by John Wiley & Sons, Inc., Copyright CBNC

Sercu, P., (1980) A generalization of the international asset pricing model, Revue delAssociation Franaise de Finance, 1, 91-135.

Sercu, Piet and Uppal, Raman, (1995) International Financial Markets and the Firm,published by SouthWestern.

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Solnik, Bruno, 2000 International Investments 4th edition Published by Addison-WesleyCopyright Addison Wesley Longman

(???, 000) International equity markets: Factors, Interrelations and Integration, Chapter 5

International Capital Markets, Asset Pricing and Financing the Firm

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